California Budget Shortfall May Trigger Draconian Cuts

SACRAMENTO, Calif. -- California faces $2 billion in automatic spending cuts at the first of the year that will reduce funding for public schools, higher education and a range of state services, according to a nonpartisan fiscal analysis released Wednesday.

The bleak assessment by the state's Legislative Analyst's Office warns of declining tax revenue and a rocky statewide economic outlook that will lead to budget shortfalls for years to come.

Democratic lawmakers and Gov. Jerry Brown had hoped for a $4 billion increase in tax revenue through the current fiscal year when they passed the state budget last summer. The analysis released Wednesday said revenue – a majority which comes from income, sales and corporate taxes – will run $3.7 billion lower than the state assumed.

Based on a pre-approved budget mechanism, that shortfall will translate into $2 billion of automatic cuts in the weeks ahead.

"Unfortunately, there are few easy options left for balancing California's budget," the legislative analyst wrote. "Difficult program reductions already have been passed, and significant one-time budget actions may be more elusive than in prior years."

California's general fund, its main checkbook for paying most state expenses, has dropped from $103 billion at the start of the recession in 2007 to $86 billion this year, a decline of more than 16 percent. Lawmakers have been making billions of dollars in cuts each year to cope with plunging tax revenue.

The coming year will provide more of the same, according to the analysis released Wednesday.

The analyst said because of the trigger cuts and other budget actions, California faces a $3 billion shortfall through the remainder of the fiscal year and is expected to have $10 billion less than the state needs in the fiscal year that will start July 1, resulting in a $13 billion gap over the next 18 months.

The current budget was based on a combination of spending cuts, fee hikes and projections of higher tax revenue in the months ahead. Republican lawmakers, who opposed tax increases, had warned that the revenue projections were overly optimistic.

"The Legislative Analyst's Office report indicates, as predicted, that the budget passed by Democrats with only a majority vote was overly optimistic and based on shaky assumptions," Assemblyman Jim Nielsen, R-Gerber, vice chairman of the Assembly Budget Committee, said in a statement.

He also noted that state spending is projected to increase by 12 percent in the fiscal year that will start July 1.

"It indicates that a lot more needs to be done to get California's budget under control, and that does not happen through tax increases," he said.

The analyst's report was one of two revenue projections called for in the state budget. The next will be released Dec. 15 by the governor's Department of Finance. The automatic spending cuts – referred to as "trigger cuts" in the Capitol – will be based on whichever report contains the higher revenue projections.

The analyst projected that midyear cuts would have to be made because revenue in the current fiscal year will fall $3.7 billion below the $88.4 billion the governor and state lawmakers had desired.

The cuts to be implemented after the first of the year include up to $100 million each to the University of California, California State University, developmental services and in-home support for seniors and the disabled. Community college fees would increase $10 per unit, and reductions would be made for child care assistance, library grants and prisons, among other programs.

Because revenue is projected to fall short by more than $2 billion, the state could cut public school funding by up to $1.4 billion, though that amount will have to be determined by Brown's finance director. Besides laying off school staff, cutting expenses and dipping into reserves, the state could allow school districts to reduce the school year by up to seven days, from 175 to 168. California had 180 school days before the recession hit.

The analyst's report assumes that the automatic cuts will remain in place for the foreseeable future.

The trigger cuts do not require further action by the Legislature. The Department of Finance will make a determination about actual spending cuts once it determines which revenue projection is higher.

But shortly after the report was issued, some Democratic lawmakers issued statements suggesting the trigger cuts were not inevitable, even though they are mandated by the state budget approved just months ago.

"Today's announcement by the LAO is indicative, but not determinative of the final decision on whether the budget triggers will be pulled next month and we must wait until the Department of Finance December forecast, which will have up to date information and certainly may alter the trigger calculation to lessen the level of trigger cuts," Assembly Speaker John Perez, D-Los Angeles, said in a statement.

State Sen. Ellen Corbett, D-San Leandro, said she was troubled by the prospect of more cuts to schools and colleges, and said the governor and Legislature should "do everything we can, to prevent mid-year cuts."

School and university officials have been paying especially close attention to monthly revenue projections because the trigger cuts will affect them and their students the most. About 40 percent of state funding goes to K-12 schools, and that funding has been cut each year since 2008. The loss of one-time federal stimulus money also resulted in thousands of additional layoffs this year.

The analyst's report noted that K-12 schools actually are due more money in the fiscal year that begins on July 1: Payments under Proposition 98, the state's minimum funding guarantee for schools, are supposed to rise by $6 billion; and the state must repay schools $2 billion that it took from local property taxes to balance the budget in 2009.

Cuts will have to be made elsewhere in the budget if the state makes good on those funding commitments for schools.

On Wednesday, California State University trustees voted to increase annual undergraduate tuition to 9 percent, $5,472 to $5,970. The system has more than 400,000 students.

The tuition hike would take effect if the CSU fails to get an additional $138 million it wants from the state.

Although the state has faced larger deficits in the past, the analyst cautioned that it will get harder for Brown and lawmakers to bridge budget gaps because many easy and one-time fixes have already been enacted. The analyst assumed no inflation increases for many state programs and put off dealing with long-term obligations such as retirement liabilities for public workers.

California and the nation are recovering from the longest and most severe economic downturn since the Great Depression. California's unemployment rate – under 5 percent as recently as 2006 – has remained above 11 percent for more than two years.

Although the legislative analyst said a double-dip recession was not likely, it did downgrade its forecast for employment growth and housing permits. It projects California's jobless rate will remain above 10 percent through the middle of 2014 and above 8 percent through 2017.